The emerging post-pandemic challenges are driving entrepreneurs to rebuild or reimagine their business’ processes, which will influence next year's budgets significantly. Entrepreneurs are working hard to create 2021 budgets right now, and are aiming to include plans for everything from marketing to staffing and beyond.
A budget is essentially a business’ financial plan that sets out its projected income and expenditures over a given period. Budgeting allows you to allocate your business funds or monthly income for the next year’s investments and expenses. CFOs can help you create a realistic budget by evaluating your current processes and identifying inefficiencies.
The pandemic has affected different industries and businesses in a wide variety of ways. Businesses’ ability to respond to COVID-19’s challenges will be a big factor in their strategies to maintain profitability in 2021. Entrepreneurs creating a budget for 2021 should consider the following best practices to improve customer satisfaction while still controlling costs.
Define Your Goals
Before creating your budget, you must first set your business goals. Then identify your priorities, such as driving more revenue, acquiring customers or increasing brand awareness. These goals may be short term, midterm or long term. Next, establish strategies and allocate funds to accomplish those goals.
Refer to Your Long-Term Financial Plan
A long-term financial plan can help you identify your business' capital needs and operational goals over time. In this time of uncertainty, a long-term financial plan can also help you to determine sustainable actions for growth.
Estimate All Expenses
You can cut the budget for non-revenue expenses and recurring expenses to free up your cash. Analyzing every single cost matters so that your total expenditures do not exceed your revenue. Your expense plan for 2021 should include:
- Recruiting costs
- Advertising or marketing expenses
- New lease or vendor liabilities that have been deferred during 2020 and need to be repaid in 2021
- New debt or interest commitments
- Bonuses or incentives to be paid to employees in 2021
- New hardware and technology requirements to support efficient remote work
- Operating and administrative costs — try to keep them as low as possible while maintaining compliance
Analyze Your Cash Flow Projections
Understand your company’s current financial situation and how to improve it in the next few months before planning your cash flow. Monitor your current balance sheet and cash flow to identify the leading indicators that may suggest actions to help you improve your cash flow. These leading indicators may include:
- Sales lead volume
- Inventory levels
- Average order value
- Cost per lead
- Return on ad spend
Allocate Budget to Digital Marketing Activities
Most businesses don’t have a sufficient budget to invest in all aspects of digital marketing. They can find the most effective marketing activities by analyzing all previous marketing results that can generate the best ROI.
You should develop a strategy to optimize your spending and resources to reach your marketing goals. In addition, allocate a budget for retargeting activities to market to existing clients for repeat purchases.
Plan Your Investments
COVID-19 has accelerated trends like remote work and digital transformation, forcing IT leaders to adapt their budgets accordingly. Prioritizing your goals is necessary so that when you get funding, you can invest it in long-term growth. CFOs should consider investments in three broad areas during their budget planning sessions:
- Capitalize on new growth opportunities — Most CFOs and finance leaders prefer investments that can boost cash flow.
- Invest in security and cloud services — IT budgets include a broader range of categories, such as digitalization or mobile computing.
- Invest in people and technology — Put resources toward potential people, processes and technologies required to thrive during the current pandemic.
Plan for What-If Scenarios
Budgeting priorities for 2021 are different for each organization based on their unique circumstances. Scenario planning can guide you, demonstrating how you should approach budgeting and forecasting for the coming year. It helps you prepare for worst-case, expected, and best-case scenarios. Predict and prepare for a wide range of possibilities that your business may face through 2021.
Make Your Budget Flexible
Prepare a flexible budget in a way that will help you maximize your profit in 2021. The businesses that quickly adapt to changes in the marketplace often have an effective strategy for risk management. Prepare a budget and adjust it as market conditions change. Companies need to regularly review and update their budgets and forecasts according to the new government policies. This can help businesses stay one step ahead of competitors.
Forecast with Care
Forecasting involves projecting the finances of a business, such as income, expenses, cash flow or balance sheets, based on current conditions. Your forecast is based on key drivers of business performance or profitability specific to the business. Entrepreneurs must prepare a robust contingency plan to deal with possible financial challenges.
Consider Outsourcing Business Functions
Outsourcing can provide you with the flexibility to scale up or down any time during the year. By outsourcing such functions as HR, payroll, accounting, finance, tech services and recruiting, you only have to pay for the services you use. Thus, you can control costs and save money while spurring growth.
Outsourcing some of the day-to-day functions that your business has in place could save you a significant amount of money. With outsourcing, you can also save time and money spent on hiring, training and retaining top talent, leaving more funds available for your cash flow needs.